Straight Line Depreciation Formula & Guide to Calculate Depreciation

what is straight line depreciation

In other words, it is a systematic way of calculating depreciation deductions in equal amounts for each unit of the asset during its useful life. In the absence of any information on entity’s policy, depreciation is usually calculated only for the period asset was in use and adjusting the expense by the fraction of period if necessary. However, entities may have specific policies regarding mid-year acquisition or disposal of asset. Sometimes entities have a policy to charge full depreciation in the year of acquisition even if it wasn’t available for whole year but no depreciation is charged in the year of disposal.

No single depreciation method is perfect, but each one has its own set of benefits and limitations. Straight Line Depreciationmeans depreciation computed using the straight line method applicable in calculating the regular federal tax. Some assets wear out over the years and begin losing their value; for example, computers, tools, equipment, vehicles and buildings can depreciate over time and must be repaired or replaced. In order for a business to accurately write off these straight line depreciation expenses and file their taxes correctly, you need to calculate their amount of deprecation. You can also work out the depreciation rate, taking into account the annual depreciation amount and the total depreciation amount which is annual depreciation amount/total depreciation amount. Each $1,600 charge will be balanced against a contra-account filed as plant, equipment, and property on the balance sheet. The asset must have a determinable useful life of more than 12 months.

Straight Line Depreciation Formula

This method is used with assets that quickly lose value early in their useful life. A company may also choose to go with this method if it offers them tax or cash flow advantages.

As a small business owner, it’s important to know which method makes the most sense for your business. A change in the estimated salvage value or a change in the estimated useful life of an asset that is being depreciated is not considered to be an accounting error. As a result, the financial statements that have already been distributed are not changed. Another way to calculate the depreciation of assets is the units of production method.

How Do You Calculate Straight Line Depreciation?

The straight line depreciation method calculates the computer will depreciate $200 every year. Other reasons for using straight line depreciation is that this method is uncomplicated, simple to apply and easy to understand.

Using this method, the cost of a tangible asset is expensed by equal amounts each period over its useful life. The idea is that the value of the assets declines at a constant rate over its useful life. Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. Still, the straight-line depreciation method is widely employed for its simplicity and functionality to determine the depreciation of assets being used over time without a particular pattern. For example, due to rapid technological advancements, a straight line depreciation method may not be suitable for an asset such as a computer. A computer would face larger depreciation expenses in its early useful life and smaller depreciation expenses in the later periods of its useful life, due to the quick obsolescence of older technology.

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